two sides to every story: a target date fund debate · pscaÕs 67th annual national conference...

PSCA’s 67th Annual National Conference Expanding perspectives 2014

Two Sides to Every Story: A Target Date Fund Debate

•  Moderator – Doug Balsam of DiMeo Schneider & Associates,

L.L.C.

•  Pro – TDFs – Susan Viston of Voya Financial

•  Con – TDFs – Deb Rosenberg of Stiles Financial Services, Inc.

Agenda / Takeaways

•  Historical perspective

•  Growth in this area

•  Available providers / approaches

•  Pros – why TDFs might be appropriate

•  Cons – why other alternatives might be worth considering

•  Q & A

The Target Date Landscape •  The secular decline of pension plans will likely leave Defined

Contribution plans as the primarily retirement vehicles of future retirees

•  73.7% of plans use target date as their QDIA1

•  In 2013 alone, $50.8 billion in asset went into target date products putting the asset class easily across the $600 billion threshold2

•  52% of young investors choose to invest in a target date option3

1  “Plan Sponsor Council of America’s (PCSA) 56th Annual Survey of Profit Sharing and 401(k) Plans 2  Morningstar 2014 Target-Date Series Research Paper 3  “Regulation Relating to Qualified Default Investment Alternatives in Participant-Directed Individual Account Plans”, United States Department of Labor, Employee Benefit Security

Administration, www.dol.gov.

DOL Target Date Guidance The Department of Labor recommends1 a plan sponsor consider the following, in addition to other criteria, when choosing a target date fund; ü  Establish a process for comparing and selecting target date funds

including reviewing participant population information ü  Understand the fund’s investments – asset class allocation,

individual investments, and how these will change over time ü  Review the fund’s fees and investment expenses ü  Inquire about whether a custom or non-proprietary target date fund

would be a better fit for your plan ü  Take advantage of available sources of information to evaluate the

target date fund and recommendations you receive regarding the target date fund selection

ü  Document the process

1 “Target Date Retirement Funds – Tips for ERISA Plan Fiduciaries”, United States Department of Labor, Employee Benefit Security Administration, www.dol.gov

Not All Built The Same Target date products have different glide paths because they have different objectives and assumptions when they are constructed. This can result in different experiences and end results for participants. Choosing the optimal glide path depends on matching unique plan demographic information and plan sponsor objectives with a target date product that shares those same objectives.

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For one-on-one use only. Not for inspection by, distribution or quotation to, the general public.

Pros: Positive Features for Participants

■ Simplicity of a complete retirement package in one fund

■ Helps overcome negative investor behavior

■ Built in diversification

■ Fund selection and monitoring

■ Automatic rebalancing

■ Adapts to changing risk profile

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Pros: Positive Features for Plan Sponsors

■  QDIA / Safe harbor protection

■  Provides age appropriate “default” option

■  Pricing – more cost effective than most advisory services

■  Maturity of TD landscape has led to positive developments:

■  Increase in Open Architecture

■  Increase usage of Custom Target Date

■  Reduction of fees

■  Increased focused on communication and education materials

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Bridging the Plan Sponsor Objective and Participant Demographics Gap

TDFs can reflect participant characteristics (and preferences) within the Plan Sponsor’s objectives

n  Most plans can utilize an off-the-shelf Target Date product

n  Reasons Plan Sponsors prefer a Custom Target Date offering:

► Utilize the plan’s current investment lineup

► Increase diversity of asset classes

► Participant base is drastically different from the average plan

► Fiduciary concerns over off-the-shelf offerings

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The “Mainstreaming” of Target Date Funds

The comprehensive aspect of TDFs have a big impact on participant perception and behavior:

n  TDF investors:

► Are significantly more confident about investing and in meeting their retirement goals

► Report higher contributions levels than non-TDF investors

–  Greater confidence most likely leads to higher contribution percentages (>2% vs. non-TDF investors)

–  More TDF investors contributed 10%+ of income than non-TDF investors (42% vs. 23%)

► Consider the convenience and built-in diversification benefits over performance

Based on ING U.S. Investment Management’s own research: “Participant Preferences in Target Date Funds: An Update: Examining Perceptions and Expectations among Target Date Investors and Non-Investors” – an online survey of 1,017 employer-sponsored participants from plans of all sizes in September 2013.

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Disclosures This information is proprietary and cannot be reproduced or distributed. Certain information may be received from sources Voya Investment Management (“Voya IM”) considers reliable; Voya IM does not represent that such information is accurate or complete. Certain statements contained herein may constitute "projections," "forecasts" and other "forward-looking statements" which do not reflect actual results and are based primarily upon applying retroactively a hypothetical set of assumptions to certain historical financial data. Actual results, performance or events may differ materially from those in such statements. Any opinions, projections, forecasts and forward looking statements presented herein are valid only as of the date of this document and are subject to change. Nothing contained herein should be construed as (i) an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Voya IM assumes no obligation to update any forward-looking information.

©2014 Voya Investments Distributor, LLC, 230 Park Avenue, New York, NY 10169

Investment Risks:

All investing involves risks of fluctuating prices and the uncertainties of rates of return and yield inherent in investing. Price volatility, liquidity and other risks accompany an investment in equity securities of foreign, smaller capitalized companies. International investing does pose special risks including currency fluctuation, economic and political risks not found in investments that are solely domestic. Risks of foreign investing are generally intensified for investments in emerging markets.

Cons: Things to Consider

•  Not all 40 year olds are the same •  Too easy for participants to be on auto-pilot

– Especially with auto enroll & default – Set and forget

•  Glide path – too aggressive/conservative for your employee base – Do employees understand “glide path”? –  Is stock allocation too high at retirement age?

Stiles Financial Services, Inc. is a Registered Investment Adviser. Advisory services offered through Cambridge Investment Research Advisors, a Registered Investment Adviser.

Securities offered through Cambridge Investment Research, Inc., Member FINRA & SIPC. Cambridge & Stiles Financial Services, Inc. are not affiliated.


•  Participants don’t use TDFs correctly – Pick 2, 3 or all of the funds

•  Glide path – too aggressive/conservative for your employee base – Do employees understand “glide path”? –  Is stock allocation too high at retirement age?

•  Underlying funds – 100% proprietary? – Would they pass screening criteria for our

core funds?

Stiles Financial Services, Inc. is a Registered Investment Adviser. Advisory services offered through Cambridge Investment Research Advisors, a Registered Investment Adviser. Securities offered through Cambridge Investment Research, Inc., Member FINRA & SIPC. Cambridge & Stiles Financial Services, Inc. are not affiliated.


•  Puts responsibility/liability on the employer to select the correct TDF family and monitor – Education for the Committee – What criteria/benchmarks should you use?

•  Misconceptions about stock/bond mix at retirement

•  Misconceptions about whether there is any sort of guaranteed income in retirement


Cons: Other Alternatives •  Model Portfolios – Risk Based

– Utilize developed core fund array – Funds are being scrutinized up front, monitored

on an ongoing basis – Employees are educated on underlying funds – Single election -- participants can see underlying

funds and performance – Diversified – Professionally managed and rebalanced – Advisor acting as fiduciary


Cons: Other Alternatives

•  Model Portfolios - Custom TDFs – Same characteristics – Advisor-developed glide paths – Can have multiple elections for target year

•  i.e. conservative, moderate, aggressive •  Dependent on recordkeeper sophistication



•  Managed Portfolios – Personalized asset allocation – An acknowledged Fiduciary – Competitive – costs coming down? – Can be used as QDIA – Questions to ask:

•  Are personal assets considered? •  How often is allocation reviewed & updated?



•  Advice Provider – Online – Advisory Firm one-on-one meetings

•  Questions to ask: – Free or are fees attached? – If fees, who will pay? – Pushing any product? Any conflicts?


Other Observations

•  Solutions typically vary by plan size – Small to mid: mutual funds – Mid to large: mutual funds, separate accounts – Mega: fully customized approaches

•  Solutions vary by provider capability


Thanks for coming!

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two sides to every story: a target date fund debate · pscaÕs 67th annual national conference...

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